In October last year, when the stock market was riding high, I wrote an article entitled Two ‘sleep-well-at-night’ FTSE 100 stocks I’d buy as we approach 2020. In it, I said it was a good time to think about portfolio protection. I highlighted two stocks I thought could provide an element of protection against stock market turbulence – consumer goods champions Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB).
In hindsight, that was a great call. As the FTSE 100 has tanked in recent weeks, falling into a bear market, those two stocks have held up remarkably well. Both are currently down less than 10%, compared to the FTSE 100’s fall of more than 30%. That’s a huge outperformance.
Looking ahead, I expect Unilever and Reckitt Benckiser to continue outperforming if stocks keep falling. If you’re concerned about the possibility of further market declines, I think these two are great stocks to own.
Bear market protection
The reason I believe ULVR and RB are likely to continue to outperform is that both companies are consistent performers. This is because they both manufacture basic products consumers generally can’t do without.
Unilever, for example, manufactures food and drink, home care, and personal care products. Its brands include Dove, Persil, and Domestos. Similarly, Reckitt Benckiser manufactures health and hygiene products, including Nurofen, Mucinex, and Dettol.
Even if the world goes into a recession, people are still likely to buy these essentials. They may cut back on discretionary items, such as new clothes, shoes, or electronics, but they’re unlikely to cut back on basics such as soap, detergent, and painkillers. This means sales and profits at Unilever and Reckitt should hold up relatively well.
Both companies also look well-positioned to benefit from the increasing focus on hygiene (due to the coronavirus). I imagine that products such as Dettol disinfectant and antibacterial wipes and Dove hand wash are likely to be in high demand in the months ahead.
So, while other companies could see a huge drop in profits in the near term on the back of lower demand for their products, Unilever and Reckitt Benckiser should continue to prosper.
Don’t let high valuations put you off
Now, the thing about these two FTSE 100 stocks is they often trade at premium valuations. It’s no different at the moment. Unilever trades on a trailing P/E ratio of about 18, while Reckitt trades on a trailing P/E of 17. That’s significantly higher than the median FTSE 100 trailing P/E of 11. This kind of valuation premium often puts investors off.
Yet, right now, we’re seeing what that premium valuation buys you – resilience. As the FTSE 100 has crashed, these two stocks have held up extremely well. It’s also worth noting both are reliable dividend payers (with healthy yields of around 3-4% on offer right now). I also expect both companies to keep paying dividends throughout this bear market.
So, don’t be put off by the high valuations. As with many things in life, you get what you pay for. In this bear market, Unilever and Reckitt Benckiser are great stocks to own.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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Edward Sheldon owns shares in Unilever and Reckitt Benckiser. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.